JPMorgan Chase & Co forecasts a weakening of the US dollar next year due to loose US monetary and fiscal policy, but warned that the market's increased betting on the possibility of future rate spikes could change this outlook.
After predicting that the USD will increase after President Donald Trump's inauguration ceremony earlier this year, the bank's monetary strategists led by Meera Chandan and Arindam Sandilya had to quickly adjust their views, as the greenback recorded its worst first half of the year in 50 years.
The group has been optimistic about the US dollar since March and has maintained that stance through the years. Strategists now predict that the USD will fall by about 3% by mid-2026 before stabilizing, equivalent to the trung-bank forecast compiled by Bloomberg, with the most obvious weakness compared to higher-yield currencies such as the Australian Dollar (AUD) and the Norwegian Krone (NOK).
However, JPMorgan strategists say some factors are making the downside scenario for the USD more complicated. US interest rates, despite being cut, are still much higher than other major economies, making USD assets continue to attract global investors and limiting diversification momentum from the US market.
From a broader perspective, JPMorgan focuses on the risk that a labor market rally or growth expectations could take investors not only off track with interest rate cuts next year but also start taking into account the possibility of a rate hike.
The outlook for the US dollar in 2026 is generally still leaning towards a downward trend, but the decline will be smaller and uneven than in 2025, Chandan and her colleagues commented.
JPMorgan said the bank could shift to a positive view on the US dollar if US economic growth improves strongly enough to not only end the current easing cycle but also push the Fed back to raise interest rates soon, thereby completely eliminating the central bank's dovish trend.
According to Bloomberg Intelligence, cycles and yield differences will return to play a key role in the foreign exchange market in 2026, although structural factors such as fiscal policy and public debt still need to be closely monitored. The US dollar could start in 2026 quite solidly as post-government shutdown economic data improves, but the risk of the market becoming too optimistic about US growth still exists," said shareholders Audi Childe freeman and Davison Santana of Bloomberg Intelligence.
According to the FED interest rate futures market, the current easing cycle of the US central bank could hit rock bottom in early 2027. Meanwhile, JPMorgan's economic group predicts that the FED will increase interest rates by about 50 basis points in the first half of 2027.
However, other market participants including nearly two-thirds of US CFO and corporate treasurer in a recent survey predict the Fed will raise interest rates next year.
Maybe there are a number of conditions that need to be met before the market can truly believe the Fed will go in this direction, Chandan and her colleagues wrote.
Those conditions include a stable return to the job market, a Supreme Court ruling on the removal of Governor Lisa Cook and experiential evidence that even a dovish Fed Chairman cannot easily influence the entire FOMC Council.
